The Teenager Company makes and sells skateboards at an average price of $70 each
ID: 1181296 • Letter: T
Question
The Teenager Company makes and sells skateboards at an average price of $70 each. During the past year, they sold 4,000 of these skateboards. The company believes that the price elasticity for this product is about -2.5. If it decreases the price to $63, what should be the quantity sold? Will revenue increase? Why.
The Teenager Company makes and sells skateboards at an average price of $70 each. During the past year, they sold 4,000 of these skateboards. The company believes that the price elasticity for this product is about -2.5. If it decreases the price to $63, what should be the quantity sold? Will revenue increase? Why.Explanation / Answer
Sorry, but we're not going to do your homework for you! First of all, that's cheating. And secondly, you won't learn from it.
But as an economics instructor, I will give you some helpful pointers that will help guide you and clarify things better so you can do it on your own.
There are several key things here that you need to realize and take into account. They are:
(1) Understanding that price elasticity of demand measure how a price change will effect the quantity demanded. So in your problem, you're looking at how a price decrease will impact the quantity demanded.
(2) Remember the law of demand! That gives you the relationship between price and quantity demanded. So think about it. Do they move together? Or do they move in opposite directions.
In other words, if price drops, would quantity demanded also fall? Would it rise? Or would it remain the same?
(3) Know how to read that price elasticity number. This is really important because it tells you something very important. It tells you whether demand is elastic, inelastic, or unitary!
Knowing which of these three it is will tell you instantly whether you'd expect the quanitty demanded to rise, fall, or remain the same. But more importantly, whether it'll be a bigger change than the amount by which price changed! Or a smaller change? Or even if it changes by the same amount!
So the law of demand tells you in which direction quantity demanded will change. And price elasticity tells you by how much it will change! That's how the two are inter-related.
(4) Make sure you understand how revenue, meaning profit here, calculated. Well that's pretty simple, you take the price times the quantity. In this problem, you know price dropped.
All you need to do now is figure out how much it dropped. And how much the quantity will change. Also, in which direction--up or down--it changed! Then you can determine the impact on revenue (profits).
FYI, this is something we call the Total Revenue Test! It tells you whether a price change will result in your making money, losing money, or making exactly the same amount of money.
I think understanding the connection between everything will help you out more.
And just so you know, this stuff is very real! That's because business will analyze and crunch these figures to help make pricing decisions and revenue projections.
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